Build with Steel, Not Sand - The Khuram Dhanani Blog
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Khuram Dhanani

Build with Steel, Not Sand

Build a Business of Substance

As an entrepreneur starting from scratch, you’ll face a lot of obstacles including stiff competition from established businesses, finite capital and resources, and a steep learning curve. However, starting from scratch does give you one tremendous advantage — you are the one who decides what to build and how to build it. Much like selecting the building materials for constructing a house, you select the components you wish to use when creating your company.

Starting out as a solo entrepreneur gives you the flexibility to experiment and learn by making decisions with your instinct and creativity rather than having to run your decisions by partners or investors. Since you have the luxury of choice, building with components that are strong, sturdy, and durable … like steel … makes much more sense than building with elements that are weak, unsteady, and flimsy … like sand.

Before you can build your steel foundation and structure, you’ll need to discover the elements that will propel your business forward, and make it resilient and profitable. Taking the time to identify and integrate these core criteria from the very beginning is the best investment you’ll ever make.

There are six top criteria that especially deserve your serious reflection.

1. Market

Look for a market that is growing, is not overly competitive, has realistic options for entry, and will allow you to scale your business. Finding such an opportunity requires thorough market research. 

Consider these three steps when choosing a market that’s right for you.

Step #1: Reflect on your passions: Your business will have a much higher chance of success when it relates to a topic you feel passionate about. When you’re enthusiastic and your emotions are engaged, you’ll do your best work, and others will feel your emotional excitement and be attracted to your business. Take time to reflect on your interests and passions to identify niche market opportunities that appeal to you and could be lucrative.

  • What skills come naturally to you?
  • What do you enjoy doing in your free time?
  • Do people ask for your advice on certain topics?
  • How have you solved problems that others might also be facing?
  • What do you enjoy learning about?

Step #2: Identify a target market: Think about the problems potential customers may face and how your interests can meet their needs. Answer these questions:

  • What problem are they facing?
  • Why would they buy?
  • Who exactly are these people? Think about the demographics of this group. What is their age, gender, geographic location, etc.? 

Once you’ve answered these questions, you’ll need to research their behaviors as consumers. This will help you determine strategies for selling your product or service to this market. You can do this with resources like Think with Google and American FactFinder.  You can also conduct a survey to ask members of your target market about their buying behaviors using a tool like SurveyMonkey and YesInsights.

Step #3: Research the competition: Understanding your potential competitors can reveal market opportunities. Your competitors may have a weakness you can exploit or have left segments of your target market underserved. Competitors may be missing a critical insight into the market that may seem obvious to you, but they are blind to it. They may even be looking to hire an outside firm (you!) to solve a problem for them. The possibilities are endless. 

Here are some websites for researching the competition: 

  • Google Trends: Trends in search engine behavior.
  • Google Keyword Planner: Monthly search volume of keywords related to your business.
  • Clickbank: To find what types of products are selling through affiliate marketing channels. You can also reverse-engineer these channels to create your own marketing channel.
  • Amazon: For finding information about what products are selling, the problems those products solve, and what kind of reviews they receive. If there’s a niche with lots of products and strong sales but bad reviews, this could signal an opportunity to build an e-commerce business.

2. Forget Cool

Many thousands of people migrated to southern California over the years to find fame and express their talents in the movie and television industries. Of course, there’s a fortune to be made there, plus there is the “cool” factor. What is cooler than becoming rich and famous in Hollywood? But, for even the most talented, there is so much competition for these jobs that the chances of success are astronomically against you. If your goal is to get ahead in life, the risk-reward calculation in this decision might not be sensible.

Focusing on what’s cool could leave you cold. What’s cool today probably won’t be cool tomorrow. The point is not to focus on cool for the sake of cool. When you build your venture based on what’s cool right now, you’re building a castle of sand.

The vast majority of successful companies are not considered cool. An obvious example is an oil company; oil isn’t exactly cool, but five of the top 10 companies with the most revenue are oil companies!

Another example of a product that isn’t so cool is the Squatty Potty. This product was designed to help people poop by positioning their bodies for a more natural and comfortable poop experience. Poop is the exact opposite of a cool industry, but the company has raked in tens of millions of dollars since it was started by a mother and son team in 2011. Are you curious about the problem they were trying to solve? They were looking for a solution to a severe constipation issue a suffering family member had. 

Instead of seeking to be cool, concern yourself with solving a real problem for your customers. Having the income from any successful entrepreneurial endeavor will easily afford you any level of status and cool you may choose.

3. Aptitude

What skills come to you naturally? Are you a born salesperson, gifted designer, especially detail-oriented, or have an affinity for coding or mathematics? We all possess natural affinities. Once we identify them, they can provide a core starting point for your business venture.

If you’re not sure what yours are, think about the activities you enjoy, maybe even since you were a very young age. Sometimes we even find our strengths later in life, in our 40s, 50s, or 60s. 

Be honest with yourself, and don’t let your pride get in the way. Part of knowing what you’re naturally good at doing is also knowing your limitations. For example, if you’re five feet tall, you will never be a player in the NBA no matter how much practice and coaching you get, or how good your free throws are. If you’ve struggled with math since elementary school, you should probably avoid starting an accounting firm. 

When you read the biographies of successful entrepreneurs, you’ll notice they often have a history of enjoying activities that later were featured in their business. Mark Zuckerberg enjoyed programming games and small software products before he created Facebook. Steve Jobs and Bill Gates liked to tinker with technology before they built Apple and Microsoft. 

You don’t need to be brilliant at every aspect of managing your business. The tasks where you lack a specific aptitude or where you become bored can be delegated. However, basing your business on your specific talents can create the determination, drive, and passion you’ll need to become successful.

4. Supply and Demand

Entering a niche market with sky-high demand is great but it won’t make you rich if there is already an over-supply of products. 

The reverse is also true as well. Going into a niche market with very little supply doesn’t automatically guarantee success either; this may simply mean there is very low demand and no need for more supply.

The ideal formula for a new business is high demand with low supply. Unfortunately, it’s extremely rare to find such a situation, so the best strategy is to look for an optimal supply and demand ratio.

If you’re establishing an e-commerce business, for example, you can leverage the data available on Amazon to find good opportunities. You’ll want to explore Amazon’s best-selling categories and then carefully review the products listed there, read the reviews, and gather as much information as you can about the buyers and what they’re seeking.

You can also click through the “Customers also bought” products to find more ideas.

Once you have a good list of product ideas, you can use Google Keyword Planner to check the search volume on these products and determine the market’s interest.

Even if these products have high search volumes, it’s likely they’re very competitive.

To take this a step further, look for opportunities on Amazon that are underserved. This way, you can own 100% of a niche market by giving people exactly what they want.

You might come across a gap on Amazon by doing a simple search. For example, when I searched for “electric guitar” there were thousands of results, but when I searched “beginner electric guitar” there were only 482. When I narrowed my search further to “beginner electric guitar for teens” there were 122. You can do this in almost any category. 

Once you found a category that has a limited amount of competition, the next thing you can do is study the competition’s products and decide if you can provide a better product for this market. Many products are limited in scope or in quality, and it might not take much work to produce a more attractive and desirable product.

5. Competition Is For Losers

Paypal co-founder Peter Thiel gave a lecture titled “Competition Is For Losers”, and his key point was that competition drives profits down toward zero. When you compete on price, someone will always undercut you; unless you are a mega-corporation that can absorb losses, a price war is usually a race to the bottom. 

One way to eliminate competition is by picking markets with high barriers to entry; high barriers are circumstances that make it difficult to enter the market such as a language issue, technical skills, or a specialty that requires specific knowledge. 

On the other hand, there are many endeavors almost anyone can start. For example, joining a network marketing company or dropshipping products on eBay are business activities almost anyone can do. 

Selecting ventures with high barriers to entry will eliminate a large chunk of your competition.

One example of a startup that got into an industry with high barriers to entry is the popular music streaming service Spotify. To get started, Spotify paid the record companies millions of dollars in royalty advances. Since the cost of entry was so high, few entrepreneurs could compete with Spotify. 

Additionally, Spotify raised the barrier to entry once it gained market share. Any company wanting to enter the music streaming space would have to pay the advances and also convince subscribers that they were better than Spotify. This is why only companies with deep pockets like Google, Apple, and Amazon have ever tried to compete with Spotify. 

An alternative to entering a market with an existing barrier to entry is to raise the barrier yourself once the market for your product increases. You can do this when you enter a new industry and quickly own it. Airbnb is an excellent example. They created the idea of renting out your room or home on a marketplace platform, and since they were able to grow the business quickly, people began to associate this model with their name. This is why it has been difficult for Vrbo and others to compete with them.

Remember when bubble tea was new and everybody had to try it? At first, there were only one or two locations where you could get bubble tea with all the different flavors. Because it was so popular, many entrepreneurs jumped on board and opened their own bubble tea stores. It wasn’t long before you couldn’t turn around without bumping into a bubble tea store. At first, it was a novelty but then the competition pours in and your slice of the pie keeps getting thinner. This is a good way to go out of business and that’s why selecting a business focus that has barriers to entry will help preserve your edge in the market.

6. Destiny

Over-dependence on others for your business needs can be fatal to the aspirations of an entrepreneur. When you reduce dependence on others, you control your own destiny. When you can’t control your destiny, it’s only a matter of time before your business margins erode and your opportunity fades away. 

Dependence on platforms, people, suppliers, traffic sources, third parties, and the amount of your own time all need to be minimized or eliminated. The ultimate goal is for your company to be independent as much as possible.

A good example of this in e-commerce is selling your products on Amazon. Although Amazon’s customer base numbers are in the tens of millions, many companies pull their products from Amazon so they can sell directly through their own marketing channels. Nike, Ikea, Birkenstock, and PopSockets have all done this. These companies chose not to be dependent on Amazon’s sales platform.

Businesses that rely on Amazon for most of their sales are at the mercy of any changes Amazon makes to their business. Notoriously, Amazon makes legitimate sellers compete with knock-off brands that have figured out how to game their rating system. 

Rather than selling exclusively on Amazon, startup e-commerce brands should leverage Amazon to market their product but focus on their own store, whether digital or brick-and-mortar, to control the destiny of their business. This same strategy of independence should be applied to every aspect of your business because the more you control each part, the more you increase your ability to survive and thrive in the marketplace.

Khuram Dhanani
Khuram Dhanani
kd@softstonecapital.com